CFI Newsletter #9: Our Next Big Report Is Out
We talk about opportunities and gaps in Climate Innovation Funding + There's two cool blueprints for us to build early-stage climate financing ecosystems around
The Climate Finance Initiative Newsletter offers quick digests and insights around what is happening in climate finance. While the Climate Finance Initiative’s current focus of work is India-centric, we will capture a global perspective of climate finance in this newsletter on a fortnightly basis.
Happy Earth Day 2021!
While every day is an Earth Day at CFI headquarters, we have something special in store for you today. We just published a new in-depth study on A Blueprint for Bridging India’s Climate Innovation Funding Gap. The full report can be viewed at the link here or the button below, and there is a shorter version right here in this newsletter if you want to dip your toes in the world of climate innovators first.
In keeping with the spirit of Earth Day towards encouraging climate action, the report goes beyond an analysis of challenges that climate businesses face in fundraising. We propose two support systems that could help catalyse a lot of early-stage innovations into scalable businesses. We detail blueprints for how to build these ecosystem enablers, which are designs we intend to follow through and pilot at CFI, from where we hope others out there will take these ideas to fruition as well.
That’s not all. When you read our report, you will realise that we are big proponents of building new models for accelerating climate startups. One, in particular, the Climate Venture Studio, is well past the planning stage at CFI.
We are excited to introduce you to Climake: our Climate Venture Studio that intends to support climate startups as a hands-on co-founder. We will share more about the program with you over the coming weeks but consider this a special announcement for our newsletter community. We are starting to build the pipeline of startups to join our first cohort, as well as a pool of mentors to guide these startups in their growth. We hope to see you as a part of this initiative.
And now, everything you need to know about Climate Innovation Funding in India.
Climate Innovation Funding by the Numbers
5%
The number of climate startups that raised significant funding post an accelerator program
India has a long tradition of encouraging innovation at its engineering colleges, with the likes of the Indian Institute of Technology Bombay (IIT-Bombay), the Indian Institute of Technology Madras (IIT-Madras) and the Indian Institute of Science (IISc) providing lab support and incubation to several successful startups. The number of labs and incubators has grown manifold in the last five years, given the government support towards setting these up. Add in the grants and concessional funding available from the likes of DST, TDB and BIRAC and you will find that innovators get adequate support today for creating prototypes of new solutions.
The next stage of support for these climate startups - accelerators and seed funds - is where things start to look less rosy. Most climate accelerators in India follow the playbook of successful technology and software accelerators, a strategy that hasn’t worked very well given the differences in how climate startups scale and the challenges that arise from selling physical products (often retrofits) in a market with strong incumbents and long B2B sales cycles.
Our analysis shows that of the 80 climate startups that joined an accelerator program between 2016-2018, only 15% raised a funding round after they exited the program. Even more disappointing, only 4 raised what we would count as significant equity rounds of USD 1 million and above.
USD 25 billion
The potential market for industrial automation and energy efficiency in Indian MSMEs
India presents a large, unprecedented opportunity for both homegrown startups and global innovations looking to scale. Most of the climate action in India has thus far focused on renewable energy, and building new wind and solar energy capacities. In the last year, there has also been some progress towards building electric vehicle infrastructure. But both for renewables and EVs, adoption has largely remained focused on building projects and infrastructure for large, well-rated corporations.
India’s 63 million micro, small and medium enterprises (MSMEs) have not even started to look at carbon emissions as an option. This is a segment we believe is at the cusp of a change. In the past year, several large global corporations like Amazon, Google and Apple have announced their intent to achieve net-zero emissions not just for themselves but for their entire supply chain. This supply chain includes millions of Indian MSMEs that now have the target to comply with their customers’ emission reduction ambitions.
A pathway to net-zero emissions for Indian SMEs can take many forms. Apart from the obvious switch to renewable energy sources, we see the potential for automation and energy-saving devices that lead to more efficient consumption. Our discussions with energy audit firms providing such solutions to SMEs indicate that an investment of US$ 500-5000 can create significant energy savings. Even at a 20% adoption rate and a median US$ 2000 investment, this is a potential US$ 25 billion opportunity.
Capitalising on this opportunity will require not just existing solutions to scale massively from their current position, but an entire ecosystem that includes equipment manufactures, installers, financing partners and skill development firms to work in tandem.
USD 100,000 ………….. USD 10 million+
The wide chasm between funding options available for climate startups also called the Missing Middle
Given that India has hundreds of incubators and labs churning out innovations, the small number of climate funds that exist today is simply too little to support ecosystem growth. Our data shows that less than 5% of early-stage investments in the 3 years from 2018 to 2020 was towards climate-focused startups. For a segment that promises to be and has been repeatedly highlighted as a trillion-dollar market opportunity by 2030, this lack of investment focus is both a surprise and a deterrent to any meaningful growth.
All in, we count less than 10 investors in India today that support early-stage climate innovation either through seed equity or an accelerator program. These investments are typically enough for startups to prove that their innovation works in a lab setting. Once they get past that stage and need significant funding to grow is when they hit a strange roadblock.
There are plenty of VC and PE funds that are willing to invest in climate change. All of them are however, looking for transactions upwards of USD 10 million. Between a startup getting their first USD 100,000 from a seed fund and growing large enough to raise several million, there is not much to talk about, and startups are largely left to their own devices to figure it out. This is what we term as The Missing Middle.
THE BIG READ
A Blueprint for Bridging India’s Climate Innovation Funding Gap
This is a summary of our report outlining challenges, gaps and solutions for accelerating early-stage innovation funding for climate startups in India. You can read the full report at the link here.
India needs innovations beyond our current focus on renewable energy and electric vehicles to make significant reduction in emissions, and to adapt our growing population to a world where hostile climate events are a norm. These innovations will come from a combination of transformative breakthrough innovations, adopting successful global solutions into India, and adapting some global solutions to the Indian context.
We estimate that India is going to need $100 billion a year to meet its climate goals. A significant chunk of this investment is required for new innovations and startups that are creating cutting edge solutions. Fortunately, a thriving ecosystem of early stage supporters exist today in the form of labs and incubators, several set inside our engineering colleges and universities, to foster a culture of innovation.
It is when an idea moves beyond a lab prototype is when the climate funding ecosystem becomes ineffective. Climate innovation ecosystem in India has largely followed the playbook of technology and software funding ecosystems, with accelerators offering 3-6 month programs full of business scale up sessions and investor/customer connects. However, climate focused businesses have several elements that make a different playbook necessary: a need to build physical infrastructure and products instead of software; long development and deployment cycles; and red ocean markets where climate change innovations often compete directly with incumbent technologies.
As a result, climate focused accelerators and seed funds have been largely ineffective in building climate businesses to scale. Today, few options exist between a climate startup raising a small $100k round, and large private equity backers looking for businesses that need at least $10 million in capital.
The Missing Middle in India's climate innovation investment ecosystem is causing multiple startups to fail on their path to scale, or considerably slowing down their growth for lack of sufficient capital. Solving for this missing middle is the most effective way to accelerate India's climate innovation ecosystem and get more innovations from labs and prototypes to self-sufficiency, scalability, and notable progress on climate impact.
We propose two financing structures that can address this missing middle through creating a validation process to sufficiently back and test high-potential innovations with real-life situations and customers and quickly pick the potential winners, and then focusing resources - funding, people, markets - at an early stage into potential winners to set them on growth trajectories.
An Innovation Demonstration Facility (IDF) can act as a one-stop shop with everything that innovators need to test, validate and prove their ideas and prototypes in commercial settings with pilot PoC customers to significantly reduce the time from idea to commercialisation. An IDF can also offer co-founder matchmaking, enabling innovators to either find business-oriented co-founders, or build paths to separate the innovation from the innovators by offering them royalties or revenue share from a business-oriented co-founder building their innovation into a successful startup.
Unlike an incubator, an IDF is focused only on validating innovations. Through a process of evaluation and testing in real-world scenarios, IDF can quickly prove that an innovation is successful and worth building into a business. The innovations that fail would also fail fast so innovators can focus on improving the solution or shift their attention to other, better alternatives. This supports a culture of iterative failure where continued validation allows for an innovation to be refined.
A schematic diagram with key elements of an Innovation Demonstration Facility An effective IDF will have 4 key components:
Offer access to manufacturing, assembly, and testing resources for lab solutions and prototypes to be made into commercial-ready solutions for piloting.
Mobilize effective pools of domain and industry experts to act as mentors and technical support to help innovators move their lab solutions / prototypes into working commercial proofs-of-concept. These industry experts can also weigh on the feasibility and scalability of the solution (or not, as the case may be), a valuable feedback for innovators to iterate and refine their solutions.
Aggregating potential customers for pilot deployment of solutions to validate them as commercial-ready proofs-of-concept.
An entrepreneur matching structure for successfully validated solutions where an innovator’s capability and interest can be gauged, and entrepreneurs and other business leads can be matched with the innovation to build a business around the innovation.
A Climate Venture Studio can act as a hands-on venture partner to early stage climate innovators to accelerate validated technology solutions into a revenue generating business that is sustainable on its own, or attractive for varied capital providers.
To be effective, such a Climate Venture Studio needs to provide 18 to 24 months support to startups with a combination of seed investment and a senior CXO team as a venture partner that will enable the startups to successfully access markets and build their business to profitability or to a scale that makes it attractive for capital providers. The long time frame also allows the startups to grow the necessary skills and hire effective resources in the business side of their operations, post the support phase.
A schematic diagram with key elements of a Climate Venture Studio By bringing the resources and investment as a venture partner, the Climate Venture Studio addresses the lack of market and business skills that are needed to make high-potential validated innovations to high potential growth startups. Through an engagement with startups who have validated their technology in a lab setting or as a proof of concept, and through a long term, 18 to 24 month support program, a Climate Venture Studio brings 3 things missing in early-stage climate innovation today:
Capital investment to address today’s gap in early-stage risk financing. Rather than a one size fits all approach, several differential investment models can be built that give startups flexibility on how returns are generated for the venture studio.
A growth team that provides expertise on business and market access that technology-savvy innovators often lack, with a long term hands-on engagement instead of a 3-6 month hands-off mentoring that incubators and accelerators offer.
Access to customers and markets that lean on the studio’s credibility when offering business opportunities to high-potential, yet unproven, startups.
There is potential to build several IDFs and climate venture studios around specific themes and use cases. Both structures will allow for startups to target several different growth paths and return models once they exit the program. Through targeting the right set of investors, matched with the return horizons of the supported innovations, both the IDF and climate venture studio can be built as sustainable models, rather than those reliant on public money or philanthropic funding.
Help Us Fix Climate Innovation Funding?
If all this talk of challenges and gaps in supporting climate startups has left you eager to contribute to the solutions, we will like to introduce you to Climake.
CFI is setting up Climake as a venture studio that will act as a hands on co-founder for climate startups and over 18-24 months, guide them from being lab prototypes to scalable, well-functioning businesses with customer traction.
The core team for Climake boasts best in class finance, marketing and technology experts. We are a couple of months away from launching our first cohort but in the meantime, we are looking for startups, mentors and ecosystem players to join our mission of building successful climate startups.
We want to hear from you if you are:
An industry expert who is passionate about mentoring young businesses that can create significant climate impact;
A startup that is building something exciting, with a potential to significantly reduce emissions at scale, or help India adapt to a more hostile climate. We are technology agnostic but will claim a particular fondness for edge sectors i.e. the ones that get a lot less attention than solar, electric vehicles and agtech. We also find joy in helping founders who are building startups not considered fashionable or the ones that VCs find boring; think physical products, B2B sales, automation for small businesses and the like.
An innovation lab or incubator that has supported climate startups up to the prototype or proof of concept stage. We will help your founders take it forward from there folks!
That’s it for Edition #9 of our newsletter.
Please send all feedback, thoughts, ideas, compliments and brickbats about the report our way. And if you know a friend or a colleague who is passionate about climate finance, or may enjoy the report, do share this newsletter link with them.
Best,
Simmi Sareen and Shravan Shankar